Inherent Risk vs. Residual Risk: What’s the Difference?

Every day, individuals and organizations encounter various risks and make decisions based on their tolerance for those risks. Risk management involves assessing inherent risks, implementing preventive measures, and accepting the remaining residual risk. To effectively address cybersecurity risks, security teams need to deeply understand the inherent risks and their impact on the business. This understanding enables them to effectively identify the most suitable cybersecurity controls to combat the existing risk landscape. Organizations may need a thorough grasp of the inherent risks to mitigate emerging threats and vulnerabilities. Therefore, comprehending and acknowledging the inherent risks is crucial in developing a robust and successful cybersecurity program.

Inherent Risk

Inherent risk emerges when internal controls are lacking, making potential risks preventable with appropriate security measures. Recognizing inherent risks plays a vital role in risk analysis, as addressing preventable risks is more valuable than focusing solely on unavoidable risks.

An example of inherent risk is the mishandling of sensitive data. Without adequate controls governing data storage, access, and sharing, there is a heightened risk of exposing the organization’s sensitive information. However, since this risk can be mitigated by implementing suitable controls, it falls into the category of inherent risk.

Another illustration of inherent risk is the absence of device or software security. Without robust cybersecurity measures, each device, network, or cloud-based account with access to sensitive data becomes a significant source of risk for the organization.

Residual Risk

Residual risks persist despite implementing control measures and cannot be entirely prevented. These risks continue to exist irrespective of the preventive actions taken by a company.

While eliminating residual risks may not be achievable, their impact can be minimized. Therefore, mitigating residual risks to reduce the overall risk level is crucial, even if complete elimination is not feasible.

Examples of residual risks include cybersecurity threats, such as data breaches, which pose a significant concern for 35% of risk executives due to their potential impact on a company’s growth. Although an effective cybersecurity program can help mitigate these risks, the possibility of third-party cyberattacks remains, making them a form of residual risk.

Internal data theft is another type of information security risk that falls into the residual risk category. While thorough employee screening and segregation of duties can help reduce this risk, it cannot be completely eradicated.

Inherent Risk VS Residual Risk

Organizations may encounter security breaches or attacks despite having security controls in place. For instance, an employee might unknowingly fall victim to a social engineering attack, or an attacker could exploit a vulnerability despite regular system patching.

To illustrate the disparity between inherent risk and residual risk in information security, consider the analogy of placing a fence around your data and networks to keep risks at bay. While the fence effectively repels most risks, some risks may still find a way to infiltrate. These risks that manage to penetrate the organization’s defenses, despite their diligent efforts, are referred to as residual risks.

Most organizations operate with some degree of cybersecurity controls already implemented. Consequently, the definitions can be adjusted to align with a more realistic context. In this context, inherent risk can be defined as “the current risk level given the existing set of controls.” Consequently, residual risk represents the remaining risks that persist even after additional controls have been implemented.

5 Ways to Calculate Inherent and Residual Risk

Calculating inherent and residual risks involves several key steps in risk management for organizations. Here are five steps to identify and mitigate inherent and residual risks:

Conduct a Comprehensive Risk Assessment

Analyze your organization and its processes to identify potential risks, considering data storage, access, and security factors. Use tools to categorize risks, assess their impact, and determine how to address them.

Create a Risk Register

Document inherent and residual risks and the controls in place to mitigate them. Include information on the likelihood and potential impact to assess their threat level effectively.

Evaluate Likelihood and Potential Impact

Consider the likelihood of each risk occurring and its potential impact on the organization, including financial consequences and other impacts like reputation and compliance. This evaluation helps determine risk tolerance and prioritize risks.

Prioritize Risks

Prioritize risks with higher likelihood or more significant potential impact based on evaluating likelihood and impact. Allocate resources to address the most critical risks first.

Implement Controls and Monitor Risk

Mitigate inherent risks by implementing appropriate risk controls, such as cybersecurity programs and access controls. Continuously monitor risks and your company’s risk profile through routine risk assessments to stay updated on evolving risks and adapt controls accordingly.

By following these steps, organizations can effectively assess, manage, and mitigate inherent and residual risks, promoting better risk management practices.

Determine Inherent vs. Residual Risks with Mobiz

Identifying inherent and residual risks plays a crucial role in effective risk management. While mitigating residual risk can be challenging, organizations have more control over addressing and eliminating inherent risks. Organizations can use cybersecurity services to enhance their risk management efforts through comprehensive risk assessments, threat monitoring, and proactive measures. These services enable organizations to stay proactive, reduce the likelihood of security incidents, and protect their assets from cyber threats.

Continuous monitoring ensures a strong cybersecurity posture. Therefore, Mobiz offers valuable assistance to companies in monitoring the evolving threat landscape and facilitating the adjustment of risk levels. Through continuous monitoring of an organization’s IT infrastructure, Mobiz enables companies to stay updated on potential threats and effectively recalibrate their risk management strategies.

Frequently Asked Questions

What is an example of inherent risk and residual risk?

Inherent risk refers to risks that exist regardless of implemented controls, such as the potential for data breaches due to weak security measures. Residual risk, on the other hand, represents risks that remain despite the implementation of preventive measures, such as the possibility of a successful cyberattack despite robust cybersecurity defenses. Inherent risks are inherent to the system, while residual risks persist even after controls are in place.

What are inherent and residual risk levels?

Inherent risk levels represent the inherent vulnerabilities and exposure to risk that exist in a system or process without any controls. Residual risk levels, on the other hand, indicate the remaining level of risk after implementing controls and mitigation measures. Both inherent and residual risk levels are crucial in risk management, with organizations striving to reduce them to an acceptable and manageable level.